Strategy, Risk and Performance Management

4 Tips for Improving Customer Profitability

Despite increased focus on customer centricity and putting customers at the core of the business, many organizations do not have an accurate understanding of which customers are profitable and which are unprofitable. With markets increasingly becoming competitive and consumer behaviours constantly shifting, investing in customer relationships is the key to long term sustained profitability.

Gone are the days of unrelenting customer loyalty. Today’s consumers are actively pursuing brands and providers who deeply understand their struggles for progress, why they make the choices they make and then create the right solutions and related set of experiences to ensure they solve their Jobs to Be Done. In other words, customers are looking for companies that are able to deliver unrivalled experience. Failure by the company to meet these expectations means the customer will simply choose to spend their money elsewhere.

Companies that are able to deliver this first class customer experience are better placed to acquire and retain more profitable customers, and increase the profitability of customers that are low or loss-making. Thus, as more companies increasingly focus on customer centricity, customer profitability analysis (CPA) should become a top priority for all businesses. CPA helps you identify which customers are profitable and which are unprofitable. Not only does CPA tell you the profitability status of each customer, done properly, it also helps you develop an understanding of why certain customers are more or less profitable than others.

Develop a Deeper Understanding of Your Customers

In the past accessing customer data was a big challenge. However, in today’s technologically driven and networked economy, detailed customer profiling is now possible. Thanks to advanced analytics, huge data sets can now easily be collected, stored and analysed to reveal strategic insights, and to a large degree, predict future customer behaviour. All this is achieved in real time.

Having a broader understanding of your customers empowers you to start offering products and services that communicate directly to various customer groups and deliver your brand promise. It also enables you to focus on one-to-one or personalized customer marketing as opposed to adopting a one-size-fits-all approach. Take time to understand what is it that your customers value about their relationship with your business and what are the experiences they are seeking in order to make progress.

So often businesses ignore the social, emotional and functional attributes of their product or service offerings and spend significant time on generics, resulting in frustrated customers and lost revenues. Customers are now hyper connected. Social media platforms are continuing to gain prominence as communication channels for customers to discuss brands, ask questions or raise issues and complaints. Millions of these voices should not be ignored at any one time as doing so leads to higher churn rates. Every social conversation is a real-time reflection of your brand promise and potential.

When companies engage and respond to customer service requests over social media, those customers end up spending more with the company and are also most likely to recommend the brand to colleagues. Do you know what customers are saying about your products and services and how to change the conversation if you need to?

Developing a deeper understanding of your customers means moving beyond the basics of income, age, gender, race or geographical location. Take a comprehensive and holistic view of your customers. Fusing different data sources, structured and structured will help you unlock key customer insights and differentiate your company from competition. Today, we have more data about customers, that is growing increasingly complex and dynamic. Gathering data is not the main problem. The real challenge is transforming information into insights that we can leverage to provide customers with a superior experience.

Know The Costs-to-Serve Component of Your Business

The core idea behind customer profitability analysis is that companies can improve their profitability and reduce their operating costs by being more customer focused. Emphasis should not be on acquiring a large number of customers, rather, on acquiring high-value, long-term customer relationships. Quality versus Quantity. Not all customers are profitable. On the face of it, they might all look profitable but when we dig deeper to assess their worth, you will be surprised to find out that a handful of them are margin leakers.

Knowing which customers are costing your business more to serve in comparison to the revenues they generate helps you channel focus and resources on this group in order to try and convert them into profitable buyers. When it comes to measuring customer profitability levels, using aggregate measures of profitability, such as gross margin, is misleading. These measures ignore the nuances of serving particular customers, segments or other populations of interest. One other common practice which is also misleading involves applying a flat cost-to-serve percentage to each transaction’s gross margin in order to calculate the transaction’s profitability.

Companies should analyse the profitability on a transaction-by-transaction basis and examining each transaction’s profitability based on its pocket margin – the actual profit earned after deducting all the costs related to a transaction. It is no secret that the majority of customers are after a superior product or service at the lowest price possible. Although at times it is possible to grant them concessions, long-term this is not sustainable.

When making pricing decisions, it is important to consider all of the things you are giving away that add value to the customer, and don’t forget they shrink your pocket margin and take money from your pocket. There is always that group of customers that is difficult to serve, constantly nagging you and making unreasonable requests. Because the majority of businesses are only interested in boosting top-line revenues and want to preserve the relationship, they are repeatedly giving in to these unreasonable demands.

We have to try by all means not to set a precedence for our customers and make them believe that they can get away with anything. There are times when concessions make sense, and other times a very bad decision.

By clarifying the impact of customer requests on individual cost-to-serve elements, a customer profitability analysis can help your company avoid leaking pocket margins through such slip-ups. At the same time, it gives you an opportunity to educate and empower your employees to negotiate more profitable prices and terms of service. ABC data can be used to calculate the overall profitability of serving a customer with a product.

A detailed breakdown of costs-to-serve can help you identify opportunities to improve profits by altering buying behaviour in ways that are relatively unimportant to the customer, but drive large cost-to-serve savings for you. By examining customers’ historical transaction details, a company can determine which products are likely to drive profitable add-on-sales. Up-selling and cross-selling opportunities are far more likely when the customers are happy.

Evolve Existing Customer Relationship Management (CRM) Systems

Digital transformation is a journey that’s well underway for many companies, and the connected customer is at the heart of it. It is no longer a case of whether a company should embrace digital, but rather, how soon. IoT and Industry 4.0 technologies are reshaping business models for the better, enabling companies across all industries to boost business performance and consistently deliver unique shopping experiences across multiple channels.

As companies adopt these new technologies, it is critical to drive data integration across the business and ensure that existing systems are capable of communicating flawlessly with other software. This will further enhance your abilities to collect and analyse data, and gain strategic customer insights at a very detailed level.

It is also important to acknowledge that the ultimate goal of CPA may not, in some circumstances, mean selling a product or service at a higher price, but providing a pleasant customer experience. Greater customer service also has a commercial value, even if it doesn’t deliver an immediate commercial benefit. Thanks to new technologies, companies are now able to discover new insights from previously unimaginable sources. Notable examples are speech and facial recognition applications. Through these applications, companies are now able get a better view of their customers, identify irritated or unhappy customers and stem some troubling trends way before they become uncontainable.

No doubt advances in computing power are presenting new strategic performance improvement opportunities for the business. However, care must be taken that the company does not end up investing in unnecessary systems. It is easier for the company to jump on the investment band wagon without first clearly answering why. Successfully and consistently identifying what information is the most relevant and generates the most value is key to selecting the right tool. Technology is an enabler of higher performance.

Transforming Customer Profitability is an Evolving Journey

For the business to obtain the greatest commercial benefit from CPA, there is need to transform not only the company’s management systems, but also the company’s attitude towards its customers. Customer experience is significantly differentiating leaders from laggards. How you engage with customers before, during, and after a sale will dictate future success. Additionally, CPA must be aligned and implemented together with the strategy of the business. If there is a divide between CPA’s stated goals within the business and the way this is actually delivered to the customer, the whole process will succumb to its knees.

Also important to note is that customer profitability analysis is an organization-wide exercise, and not an isolated exercise embraced by one department or segment only as this will not deliver the required levels of cost reduction and profit increases. However, due to resource constraints, you can start small, focusing first on a portion of revenues or a single product line, business unit or geography, and then expand the effort as resources allow. In the long run, these pilot projects can act as proof of concept and also generate profit increases that can be used to fund further improvements. It is better to start small than do nothing at all.

Customer profitability analysis gives a company a clear view of how much revenue each customer generates (what they buy and how they buy), how much it costs the company to generate that revenue, and, most importantly, when and why these costs are incurred. This information is then used to guide efforts to transform the company’s less profitable relationships into improved profitable buyers. Firing customers should be your last resort after you have exhausted all reasonable efforts.